Method of fundamental analysis to find out cheap stock, particularly in banking sector.

FINDING OUT CHEAP STOCK

February 5th, 2010 | Author: admin

It is for those who like method of fundamental analysis to find out cheap stock, particularly in banking sector. There are 6 methods that can be used to, those are:

Price to Book Value (P/BV)

It is a method that has common tool used for evaluating bank stock, usually used to see the real value of a bank’s net asset. Investors usually have

• a will to buy stock at P/BV,  ROE 2 times when at least by 15% or
• a will to buy at P/BV, ROE 3 times if at least 20%.

Price to Earning Ratio (PER)

It is commonly understood as price of share compared with net income. This ratio is also often used as P/BV. But, the difference, it is usually used to compare PER of stock with

• PER of industry or
• PER of market.

The weakness of PER calculation is easy distortion by revenue that is unrelated to operation such as foreign exchange earning (or other) that could affect net income position outside the operational performance. PER of banking in 2010 reached 20 times, inline with PER of market in range of 12.5 times.

Price to Pre-Provision Profit (P/PPP)

Ratio of P/PPP is used to measure operational performance of company. Net income volatilities caused by imposition of provisional costs and tax costs can be avoided with this method which is only focus on company’s core business. Still there is criticism of this method, because cost of provision should also essential for the calculated to reflect bank’s management quality. Because of the lower-and-lower P/PPP value of bank’s stock, then it is said that bank’s stock price is considered cheap.

Market Cap to Deposit

This method is used to see how far a representation of bank’s potential growth prospect. The logic which is used in application of this ratio is representing fund that can be used by the bank to be channeled into productive asset, particularly loan channeled into high-impact result. Measurement of this ratio will only be valid if banking sector in good condition and not in financial crisis because of curtain reasons of bank.

Dividend Yield Compared with Risk Free Rate Return

It is valuation method used to accommodate those who argue that buying stock is only worth doing if offered dividend yield could be upper yield offered by risk free rate. The weakness of this method is not count possibility of price increase, especially for countries in category of emerging markets, which have capacity to provide high-enough investment return level from price appreciation only. Therefore, there are investors that more likely tend to get profit from higher price multiplication compared to dividend income.

ROE Compared With Cost of Equity

Rationality that is used in applying this ratio is when ROE of bank under its COE (number of return or minimum required return of investor to invest in a stock), then it is felt better to invest fund in other bank that give more profit. The weakness of this ratio is in risk premium or beta coefficient. Meanwhile, the weakness of ROE is difference of net income quality used to calculate ROE and capital optimizing (equity) owned by bank (whether too little or too much) that can affect the level of bank’s ROE.

(from: inter-sources)
http://techbostonworks.com/?p=407